The Glasgow Financial Alliance for Net Zero (GFANZ) is asking the market for feedback on plans to create more detailed definitions for transition finance.

Last year, the influential body announced that investors could credibly support the climate transition by allocating their capital to solutions, climate-aligned companies and assets, or companies and assets with a serious commitment to transition. They could also invest in the timely phase-out of polluting assets, such as coal plants.

Now GFANZ wants to flesh out those four labels to create “common definitions of transition finance” and find a way to calculate the impact of such investments on global emissions.

“Creating consistent definitions that are applicable across markets and sectors will help to scale transition finance to ensure real-economy decarbonisation, help financial institutions independently identify their risk exposure and the investment opportunity ahead,” it said in a statement.

“They can also serve as safeguards to verify that the reduction of emissions in their portfolios corresponds to actual emissions reductions in the real world, rather than being achieved solely through divestment from high-emitting assets.”

GFANZ, which is the umbrella body for more than 650 financial institutions with net zero commitments, wants members to be able to “segment portfolios” using the four labels.

For each type of transition finance, it is proposing a way to calculate what it terms the ‘Expected Emissions Reductions’ or EER. A six-week consultation is now underway to gather feedback from stakeholders on the four definitions and their EER approaches.

Push to scale transition finance

The move comes as market participants and lawmakers grapple with the challenge of scaling transition finance at the necessary pace, while keeping it credible.

Yesterday, the US Treasury unveiled new ‘principles for net-zero financing and investment’, to encourage financial institutions in the country to support transition finance.

It’s hoped that the growth in corporate climate plans will create a pipeline of transition finance opportunities for investors in coming years.

The proceeds from any green bonds under the upcoming EU Green Bond Standard, for example, will have to demonstrably help issuers meet the transition plans they disclose under the Corporate Sustainability Reporting Directive.

Regulators in the UK have also introduced requirements for companies and investors to publish their net zero strategies, and these rules will be strengthened to incorporate guidelines from the Treasury’s Transition Plan Taskforce, due out next month.

The taskforce’s guidelines are based on transition plans guidance published by GFANZ last year.

Read the digital edition of IPE’s latest magazine